There’s more to VCTs than the obvious tax benefits and they could suit more clients than you might think. Octopus Investments’ Paul Latham highlights three client financial planning scenarios where VCTs can offer suitable solutions
Many advisers are aware of Venture Capital Trusts (VCTs) as an investment suitable for certain clients who are keen to invest in smaller companies while also receiving tax benefits for their investment.
A VCT investment incentivises the support of earlystage companies by offering a range of tax benefits to compensate for some of the risks of smaller company investing. As a listed company that invests in a diversified portfolio of smaller unlisted companies, a VCT offers upfront income tax relief of 30% on investments up to £200,000 each year, provided the investment is held for five years. And there’s no tax to pay on any dividends received.
VCTs offer an attractive route to investment in smaller companies via experienced managers who can seek out strong opportunities for investment and provide portfolio companies with valuable support needed to grow. These companies, which are often innovative and groundbreaking in their focus, offer the potential for growth and diversification within a client’s portfolio.
By investing across a large number of smaller companies, VCTs can target growth in a less volatile fashion than some other smaller company investments. They can also pay investors a tax-free income stream. As a result, they can present clients with a unique investment opportunity that they may not be aware of.
The ability to target a tax-free income stream while benefiting from generous upfront tax relief has made VCTs increasingly popular for advisers seeking to complement a client’s wider investment portfolio. And in this article, we explain why VCTs could be suitable in three common client scenarios.
Additional rate taxpayers or high-income clients
High earning clients who have high income tax bills might want to consider a VCT if they have used their ISA and annual pension allowances or want to build an additional portfolio to support their retirement plans.
Individuals in this group face limitations on annual pension and ISA contributions, and legislation has also now placed tighter limits on the amount of money they can contribute to their pensions in their lifetime due to the freezing of the lifetime allowance. Individuals can incur additional charges if their pension pot exceeds their lifetime allowance when they start to access it (currently frozen at £1.07 million).
As a result of the freezing of the lifetime allowance, more investors will be worried that making more contributions to their pension will increase the risk of triggering this charge in the future, even at a relatively early age, and are looking for additional ways to save tax efficiently each year.
Once a client expects to hit or exceed their lifetime allowance or has contributed more than their annual pension allowance for a year, a VCT can become an attractive way to make annual tax efficient investments. Additionally, a VCT can be accessed, subject to liquidity, ahead of a pension, and offers the potential for tax-free income.
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